The forex market is the biggest industry in the financial market, with trillions of dollars being traded on any given day. It is significantly bigger than the stock, commodities, and bond markets.
The definition of forex trading is that it is the practice of buying and selling currencies with the goal of generating a profit.
To a large extent, everyone is a forex investor. For example, in 2022, the EUR/USD pair crashed so hard that it moved below parity level.
At its lowest level, the pair was about 13% below its highest point during the year. Therefore, Europeans who held US dollars instead, saw their euro accounts do significantly better.
In this article, we will focus on exotic currency pairs and assess what they are.
What is an exotic currency pair?
An exotic currency pair is one that is made between two thinly traded currencies. For example, the KES/TRY (Kenya shilling vs Turkish lira) or BRL/ZAR (Brazilian real vs South African rand) can be viewed as exotic currency pairs because not many people trade them on a given day.
Exotic currency pairs are mostly made up of two emerging market currencies. An emerging market is a country that is yet to reach developed country status. They include countries like Turkey, South Africa, China, Singapore and Brazil among others.
At times, exotic currency pairs are also made of developed and emerging market currencies.
Here is a list of top exotic currency pairs
- EUR/TRY ( Euro vs Turkish lira)
- SGD/ZAR (Singapore dollar vs South African rand)
- BRL/TRY (Brazilian real vs Turkish lira)
- SGD/MXN (Singapore dollar vs Mexican peso)
- CNH/RUB (Chinese yuan vs Russian ruble)
- EUR/ZAR (Euro vs rand)
- GBP/RUB (British pound vs Russian ruble)
- EUR/MXN (Euro vs Mexican peso)
- MXN/ZAR ( Mexican peso vs rand)
Exotic currencies vs majors and minors
Exotic currency pairs differ from the other two main types of currency pairs: majors and minors. A forex major is made up of two developed country currencies like the US, Australia, and New Zealand.
These pairs are highly liquid and are mostly significantly cheaper to trade because of their thin spreads. Examples of the top forex majors are the EUR/USD, GBP/USD, and USD/CHF.
The main characteristic of a forex major is that they must have a USD as either the base or quote currency. They are also highly liquid currencies, which makes them have tighter spreads.
Further, these currency pairs have significantly higher volumes and are offered by all forex brokers.
The other main type of these currency pairs is minors. A minor currency pair is made up of two moderately traded currencies.
As a definition, these pairs are made up of developed countries excluding the US dollar. Examples of the most popular forex minors are the EUR/GBP, AUD/NZD, AUD/GBP, EUR/JPY, and GBP/SEK.
Minor currency pairs have several characteristics, including higher trading volumes than exotics and they are offered by many brokers.
Characteristics of exotic pairs
Exotic currency pairs have a number of characteristics, including:
- Thinly traded – First, these currency pairs are thinly traded since most traders prefer highly-liquid ones.
- Wider spreads – A spread is the difference between the ask and bid of a pair. Exotics have a wider one, making them more costly to trade.
- Not offered by all brokers – Because of their thin volumes, most brokers don’t offer these currency pairs.
- Low volumes – These exotic currency pairs have extremely low trading volumes.
- Inadequate timely news – At times, it is hard to find the most recent important news on these pairs.
Pros of trading exotic pairs
There are quite a few advantages of trading exotic currency pairs in the forex market. For example, some people have specialized in them, mastered their moves, and now make a lot of money on them.
Further, because they are thinly traded, these currency pairs can have some hidden opportunities that most traders are not focusing on. As such, it is possible for one to make uncorrelated returns.
Why are exotic forex pairs risky
Most analysts and experts believe that exotic pairs are extremely risky for traders and investors. As such, they are only recommended for highly experienced people with a vast experience in the industry.
These risks are mostly because of the characteristics that we have mentioned in the previous section.
More expensive to trade
Forex brokers don’t charge a commission for trades executed in their platforms. Instead, they make money through what is known as the spread between currency pairs.
Spread is defined as the difference between the bid and ask prices. The spread is usually much thinner for major currency pairs like the EUR/USD and GBP/USD pair. On the other hand, exotic pairs, because of their nature, usually have extremely wide spreads.
It is also more expensive if your account is in US dollars, euros, or British pound. To execute the trade, the broker will first need to convert the account currency to the exotic pair.
Highly volatile
Exotic currency pairs are usually highly volatile compared to majors. For example, the Turkish lira is more volatile because of the lack of independence of the Turkish central bank.
Similarly, currencies like the Argentine and Brazilian peso tends to be volatile because of their high national debt.
While traders prefer high volatility, exotic currency pairs are riskier because they are also not very liquid.
Illiquid
Exotic currencies are highly illiquid because of the small number of traders who specialize on them.
Also, the volume of trade between the two countries is usually substantially small. It is this illiquid nature that leads to high costs of trading.
How to trade exotic forex pairs
Exotic forex pairs are traded in a similar way to forex majors. Traders use several strategies to achieve this:
- Fundamental analysis – This is where they look at news that could move a currency pair. The most popular news are on central bank decisions, elections, and commodity prices.
- Technical analysis – This is a process that is made up of three key parts: use of indicators, chart patterns, and candlestick patterns. Indicators include tools like moving averages, Relative Strength Index (RSI), and the MACD.
- Chart patterns take longer to form and include patterns like triangles, head and shoulders, rising and falling wedges, and double top and bottom.
- Candlestick patterns are made up of one or more candlesticks and can predict a reversal or continuation.
FAQs
What are exotic currency pairs?
Is BRL an exotic currency?
What is an example of exotic pairs in forex?
What is the difference between forex major and exotic?
External useful resources
- What are the pros and cons of exotic currency pairs? – Quora
